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To frack or not to frack: investing either way

Hot tips if UK shale gas exploitation powers ahead... and if it doesn’t

14 November 2015

9:00 AM

14 November 2015

9:00 AM

What a curious world we live in. It is now conventional wisdom that we have all embarked on a journey to a carbonless future; and this despite there being no scientific unanimity as to the connection between global warming and carbon emissions.

Striving to reach this nirvana has resulted in surprising liaisons and compromises, the most important of which is the UK government’s determination to embrace old nuclear technology despite the well-known problems of disposing of hazardous waste — which will be left to be faced by future generations. In the meantime, funding of our uranium-powered future is in the hands of a French state company and our new friends from China, who themselves are busy designing and constructing power plants fuelled by thorium, which is safer and less expensive than uranium. They have been encouraged by our government’s guarantee that we consumers will pay twice the current price of electricity once the power comes on stream, possibly in ten years’ time.

In the meantime, as if the good Lord realised some interim help is necessary, we have been presented with a huge opportunity. Deep beneath the north of Britain exists a thick stratum of rock and shale that may contain enough gas to power Great Britain plc (and certainly the Northern Powerhouse) into a new industrial revolution. This gas could fill a looming energy gap created by decommissioning of coal-fired power stations.

But a vocal and well-organised populist movement perceives all sorts of possible disasters resulting from the fracking process needed to extract gas and oil from shale. These activists are not convinced that experts from various regulatory bodies are capable of monitoring exploration and exploitation. After three years of delays following one partially drilled exploration well in Lancashire, we still do not know whether this gift from above is exploitable or not. Many more exploration wells need to be drilled before any production decision can be taken. But not even this limited activity is taking place. In the meantime, blackouts are getting nearer and inevitable voltage fluctuations will disrupt the computer-based systems that now dominate most activities in our digital and interconnected world.

Those who believe the darkness can be avoided by other means are embracing the renewables sector, oblivious of the fact it depends on variables such as wind and sun and over the next decade is unlikely to account for more than about 20 per cent of our energy mix. And just to confuse matters, the fat subsidies that have encouraged the middle classes to change their roof tiles for solar panels and to construct wind turbines in their fields are now being withdrawn.

So where in all of this energy mess might an entrepreneurial investor find opportunities? Here are my bets — on both possible outcomes of the fracking stand-off.


(Prices as at 3 November; I hold shares marked •)

Hot tips if fracking goes ahead…

 
Can the government overcome or over-rule local fears about fracking and fast-track shale gas exploration? If so, then the immediate beneficiaries are three small oil and gas companies with significant exploration licences: Egton Oil (9.75p), IGas (20.5p) and to a lesser extent Europa Oil & Gas (3.75p•), assuming it is successful with current licence applications. If the exploration stage is successful and exploitation is similarly fast-tracked, then the next beneficiaries will be the many US oil service companies needed in support, but also our own Petrofac (£8.42) and Wood Group (£6.07).

The availability of secure cheap energy would also be a huge stimulus to the UK economy and in particular to manufacturing and heavy engineering. Other big users of power are the chemicals and building materials industries; brick makers such as the newly quoted Ibstock(£1.94) and Michelmersh (96p) come to mind.

David Cameron visits a shale project in Lincolnshire

David Cameron visits a shale project in Lincolnshire

The Northern Powerhouse could become a reality, with positive knock-ons for many other industries and companies.

…and if it doesn’t

 
If, as seems more likely, our onshore gas and oil potential continues to be mired in planning delays, environmental studies and local opposition, then investment opportunities might be found elsewhere.

Renewables (despite the removal of subsidies) and power conservation are areas that should benefit from the pain of others. Here are a few ideas from sectors in which profitable companies are, so far, few and far between.

Battery storage will become ever more important: ITM Power (27.5p), with its large- scale hydrogen system, is a market leader. It has still to make a profit, but the use of off-balance-sheet project financing should help, and those elusive profits mayyet arrive.

Camco Clean Energy (6.75p•) is developing a vanadium-based battery for power storage and will have several different size units in trials over the next six months: if these are as efficient as is predicted, the company will be transformed.

The ponderous sounding Aggregated Micro Power Holdings (78.5p) is a UK leader in biomass power generation and its ability to deliver and service domestic biomass power units will stand it in good stead when the lights go out.
Flowgroup (16.25p) has promised much for a long time. It produces ‘smart’ domestic boilers that are highly efficient and produce ‘low-carbon electricity’. It also markets a battery system using compressed air. At the end of May there was a successful £21 million fundraising which should provide enough breathing space to relaunch these products.

APC Technology Group (7.25p) declare themselves to be a ‘provider of technologies developed to reduce energy consumption’: their time could be now. The group is profitable, although recent acquisitions have not worked well and will impact full-year results. But this seems to be recognised by the market, which only two years ago valued the shares at 65p. Following the appointment of a new managing director this looks like a recovery situation.

And in such a confused energy landscape, we all need one of those.


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